Let's Not Go Congratulating Ourselves Just Yet

by dday

Ezra Klein is correct that the conservative response to the financial crisis has been just as discredited as the conservative policies that caused it:

By contrast, my take on this will make David Broder cry: The liberals were right. Not the Democrats. The liberals. They were right that deregulation had gone too far. They were right when they spent the last few years offering unpopular predictions that the Housing Bubble would pop. They were right that a liquidity problem had become a solvency problem. They were right that government intervention on a massive scale was needed to stabilize the capitalist system. They were so right, in fact, that Hank Paulson and George W. Bush couldn't hold the line, and will now sign into law the most profoundly socialist measure this country has seen since the 1930s.

I make this point not to wrap myself in a warm blanket of Schadenfreude -- there's little joy in seeing your allies proven perspicacious by a catastrophe -- but because it's actually important. The liberal understanding of the economy and its problems has been, in recent months and years, superior to the conservative understanding of the country and its problems. And this has only sharpened in recent weeks, as the Republican Party has spun off into the Gamma Quadrant with laughable theories about ACORN and Fannie Mae and Freddie Mac and the Community Reinvestment Act of 1977. Their argument isn't wrong in the sense that it's a serious engagement with the situation that happens to be less empirically sound than competing theories. It's just nonsense. And this isn't a time when we can afford governance powered by nonsense. We need governance by people who understood the magnitude and nature of the problem, and have some idea how to go forward fixing it.

This is all true to varying degrees. But it isn't clear that this effort to recapitalize the banks will prove sufficient to fixing the wreck that has been made of the economy. As Mr. Nobelist says, the credit markets still look tight. He's also predicting a likely global recession as the pain caused by the credit crunch starts to trickle into the greater economy. Noriel Roubini is similarly pessimistic:

Oct. 14 (Bloomberg) -- Nouriel Roubini, the professor who predicted the financial crisis in 2006, said the U.S. will suffer its worst recession in 40 years, causing the rally in the stock market to ``sputter.''

"There are significant downside risks still to the market and the economy,'' Roubini, 50, a New York University professor of economics, said in an interview with Bloomberg Television. "We're going to be surprised by the severity of the recession and the severity of the financial losses.''

The economist said the recession will last 18 to 24 months, driving unemployment to 9 percent, and already depressed home prices will fall another 15 percent. The U.S. government will need to double its purchase of bank stakes and force lenders to eliminate dividends to save them from bankruptcy, Roubini added. Treasury Secretary Henry Paulson said today he plans to use $250 billion of taxpayer funds to purchase equity in thousands of financial firms to halt a credit freeze that threatened to drive companies into bankruptcy and eliminate jobs.

"This will be the first round of recapitalization of the banks,'' Roubini said. "The government has to decide to intervene much more directly in the provision of credit and the management of these companies.''

All of which brings me to wondering whether or not the Bush Administration finally tried on the "liberal" solution after it became clear that no solution could limit major damage to the economy. They're also implementing it in a fundamentally flawed way, as Roubini alludes to, by taking non-voting stock from the banks instead of making sure they can impact management decisions. Therefore, while this partial nationalization may stave off a depression, it will be insufficient to stop a deep recession, which will then be blamed on - the nationalization plan. If we only went ahead with tax cuts for the rich and capital gains tax holidays, everything would have been fine.

This seems to me to be the Great Switcheroo here. John McCain is out today with just such a tax cutting plan, and it's at the front of the Republican "stimulus" package, which also calls for... well, offshore drilling, of course. (Didn't anybody tell them the moratorium was lifted?) This, of course, won't stimulate anything. But the point isn't to get it enacted. The point is to offer something else that could have been tried. It's a long game strategy.

We're in for some hard times and Democrats ought to prepare the country for it. Sen. Obama did a half-decent job of that yesterday. But it's clear that Republicans will try to wriggle off the hook and blame the solution as the problem. It's just their way.